Volatility comparisons

The Mexican peso (MXN) and Brazilian real (BRL) are insulated to an extent from variations in the values of the Swiss franc and euro; however, both MXN and BRL have futures and options markets that provide possible forex trading opportunities as their prices move.

“Calls on four currencies” (below), shows calls on March 2015 futures on Jan. 30, 2015 for the peso, real, franc and euro. The peso and euro options price curves are close at each strike price, while the Swiss franc and Brazilian real form the outer edges of high and low price variations—indicating higher volatility for the Swiss franc. This is not surprising after the sudden disclosure on Jan. 15 that the Swiss National Bank was abandoning its effort to restrain the value of the franc versus the euro.

On the other hand, the Brazilian real has the lowest option price curve, sinking toward either zero priced calls on the horizontal axis or a price equal to the call’s intrinsic value in terms of the futures price at the time of expiration in March 2015. 

“Calls on four currencies” and “Five currencies” (above) show price variations in two lights. On “Calls on four currencies,” the Brazilian real has the lowest call price curve, indicating that its options are viewed as having less value compared with options on the Swiss franc, Mexican peso and euro. 

The lower value is due to the options market predicting a narrower range of potential prices for the real at the time of expiration in March. Because of its smaller forecasted price range, the real’s call price curve is lower—as measured by the height of the curve where the futures price is equal to the strike price. The height of the option price curve is one measure of comparative volatility.

On the other hand, “Latin American currencies” (below) shows that the real has a greater variation in price movements than the Mexican peso over the short-term, and is currently lower than the peso’s cumulative percentage price change.